Monday, September 15, 2014

Today the Tax Foundation released its 2014 index of International Tax Competitiveness. Of the 34 countries ranked on the basis of "more than forty variables across five categories: Corporate Taxes, Consumption Taxes, Property Taxes, Individual Taxes, and International Tax Rules," the U.S. came in #32, only a few points ahead of notoriously tax-loving France.

The chart above shows my representative sampling of 20 of the countries included in the index.

Key findings:

Estonia has the most competitive tax system in the OECD. Estonia has a relatively low corporate tax rate at 21 percent, no double taxation on dividend income, a nearly flat 21 percent income tax rate, and a property tax that taxes only land (not buildings and structures).

France has the least competitive tax system in the OECD. It has one of the highest corporate tax rates in the OECD at 34.4 percent, high property taxes that include an annual wealth tax, and high, progressive individual taxes that also apply to capital gains and dividend income.

The ITCI finds that the United States has the 32nd most competitive tax system out of the 34 OECD member countries.

The largest factors behind the United States’ score are that the U.S. has the highest corporate tax rate in the developed world and that it is one of the six remaining countries in the OECD with a worldwide system of taxation.

The United States also scores poorly on property taxes due to its estate tax and poorly structured state and local property taxes.

Other pitfalls for the United States are its individual taxes with a high top marginal tax rate and the double taxation of capital gains and dividend income.

As the study notes,

Taxes are a crucial component of a country’s international competitiveness. In today’s globalized economy, the structure of a country’s tax code is an important factor for businesses when they decide where to invest. No longer can a country tax business investment and activity at a high rate without adversely affecting its economic performance. In recent years, many countries have recognized this fact and have moved to reform their tax codes to be more competitive. However, others have failed to do so and are falling behind the global movement.

This goes a long way to explaining why the U.S. economy has been struggling in recent years.

To be sure, not all the countries that rank higher in the index have stronger economies. Indeed, the U.S. economy is doing better than most these days, although it is only managing to post annual growth of slightly more than 2%.'

If there's any surprise here, it's that the U.S. economy is not doing worse. We are still relatively prosperous in spite of our onerous and burdensome tax code. This speaks volumes to the inherent dynamism of the U.S. economy, which is rather adept at overcoming adversity. If we only freed the economy from its tax shackles, it's hard to imagine how much better we could be doing.

8 comments:

Worse than the US tax situation is the lack of any real political push to fix it.

Europe and Japan are in an economic mess, yet they have a better tax situation. They have been able, to some degree, protect their businesses from high taxes (and a desire to relocate).

The US is still taxing business like it has a competitive edge, but it is gone. If the US fixes this, it still will suffer the fate of Europe and Japan, as the government is growing its redtape, cronyism, disincentives and corruption faster than the productive economy.

Well, cut federal agency spending and eliminate the corporate income tax. Wipe out taxes on dividends too. I think we will prosper without a HUD, Labor Department, USDA, NSA or Commerce. Cut DoD in half, privatize the VA. The only thing stopping this is the D-Party and the R-Party. Aside from that....

Benjamin, if you ever run for office you've got my vote locked up. Every time you've opined, I find myself in enthusiastic agreement with you. Even on seemingly out-of-step opinions - like the cutting of DoD spending in half - we're on the same page. Play on, playa.

Benjamin: Indeed, the fiscal side of things is in complete disarray. As much as I don't like a fiat currency system, the Fed has actually been pretty decent through the crisis. The spotlight has shifted to the fiscal side. And we as a nation are failing miserably on that score, and for reasons that are more fundamental than we like to admit. (The problem runs much deeper than a few bad political personalities; the people have divided and entrenched interests as you point out so often.)

Indeed, I think every federal agency should be cut. But I laugh at myself when I think of the political feasibility of it. I also would like to see peace on earth. Ain't gonna happen.

I'm reminded of the last line in PJ O'Rourke's Parliament of Whores: "And the whores are us."

Interesting data from the Tax Institute. Using the same data, I whipped up a different kind of chart that emphasizes the problems with US corporate taxation even more clearly. Here's the link: http://www.economonitor.com/dolanecon/2014/09/22/everything-thats-wrong-with-the-us-tax-system-in-one-chart/

Ed: very interesting chart! It's a great illustration of the basic principle behind the Laffer Curve. When tax rates are too high (uncompetitive), revenues are lower than they otherwise could be. Lowering onerous tax rates and eliminating distortions can actually generate more revenue by making the economy stronger and the tax base bigger.